BUSMGT713 Chap.4 Flexible budgets and flexed budget variances
Flexible budgets and flexed budget variances
Week 2 of the course is titled budgeting and cost control, and its two numerical workshop solutions follow one layout: an original budget column, a flexed budget column rebuilt at the volume actually achieved, an actual results column and a column of flexed variances, each labelled F for favourable or A for adverse. This chapter teaches that layout.
It shows how to derive a budget rate per unit from budget totals, why fixed overhead keeps its original amount when the budget is flexed, and how to sign each variance by asking whether the line raised or lowered profit. It then separates the sales volume variance, which compares flexed with original profit, from the flexed variances that managers can influence, and reconciles both to the overall budget variance.
A candle maker that sold 1,000 fewer candles than planned carries the method, and a profit bridge turns its variance table into a picture. The chapter ends with a driving school whose adverse overall result comes almost entirely from lost bookings rather than weak control.
What this chapter covers
- 01
Why an original budget cannot judge performance when volume changes
- 02
Budget rates per unit and the flexed budget at actual volume
- 03
Flexed variances for revenue, materials, labour, variable and fixed overhead
- 04
Signing each variance F or A by its effect on profit
- 05
Sales volume variance and the overall budget variance reconciliation
- 06
Reading a profit bridge from original budget to actual profit
Worked example · free
Kauri Hill Candles: splitting a $12,850 shortfall into volume and control
- +1Flexed budget profit = 7,000 candles times $8.50 minus $30,000 = $59,500 minus $30,000 = $29,500.
- +1Sales volume variance = flexed profit minus original profit = $29,500 minus $38,000 = $8,500 A.
- +1Total flexed variance = actual profit minus flexed profit = $25,150 minus $29,500 = $4,350 A.
- +1Overall budget variance = $25,150 minus $38,000 = $12,850 A, which equals $8,500 A plus $4,350 A.
- +1The production manager answers for cost lines inside the $4,350 A; the $8,500 A reflects candles not sold and belongs with sales.
Key terms
- Original budget
- The plan prepared before the period, set at the volume management expected to sell.
- Budget rate per unit
- Each variable budget total divided by budgeted volume, used to rescale that line to actual units.
- Flexed variance
- The gap between an actual figure and its flexed budget amount, labelled by its effect on profit.
- Overall budget variance
- Actual profit less original budget profit, equal to the sales volume variance plus all flexed variances.
- Profit bridge
- A step chart that walks from original profit through each variance to actual profit.
Flexible budgets and flexed budget variances FAQ
What is a flexed budget in management accounting?
It is the original budget redrawn at the activity level actually reached. Variable revenue and cost lines are multiplied out at their budgeted rate per unit, while fixed costs stay at their planned totals. Comparing actual results with this redrawn budget isolates spending and pricing performance from the effect of selling more or fewer units.
How do I decide whether a variance is favourable or adverse?
Compare the actual figure with its flexed amount and ask what the difference did to profit. Higher revenue than the flexed figure is favourable; a cost above its flexed allowance is adverse. Write F or A beside every line, as the workshop solutions do, and confirm that the signed lines add to the profit variance.
Why does fixed overhead not change when the budget is flexed?
Fixed overhead was planned as a total for the period, not as an amount per unit, so selling fewer or more units should not alter the allowance. Any gap between actual and budgeted fixed overhead is therefore a spending variance, such as an unplanned repair or a higher rent.
What is the difference between the sales volume variance and the flexed variance?
The sales volume variance compares flexed budget profit with original budget profit, so it measures only the contribution gained or lost through volume. The flexed variances compare actual results with the flexed budget, so they capture prices, spending and efficiency once volume is known, and they are the part a cost-centre manager can be asked to explain.
Can a favourable overall variance hide poor control?
Yes. When volume beats plan, the extra contribution can outweigh adverse price or cost variances, so the overall figure looks good. Only the flexed comparison exposes selling below budget price or paying more per unit than planned, which is why the course compares actual results with the flexed column.
Assessment move
Set up four columns on paper before reading the numbers closely: original, flexed, actual and variance. Derive every budget rate per unit from the original totals and write it in the margin. Fill the flexed column, leaving fixed costs at their budget amounts, then compute profit in each column. Label each variance F or A by its effect on profit and check that the signed lines add to the flexed profit variance.
Add the sales volume variance and confirm the overall reconciliation. Finally, draw a rough profit bridge and write one sentence on the largest step. Repeat the routine on a case where volume rose rather than fell, so you meet both directions.
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